United Kingdom United Kingdom is included in the IFAD GAAP Convergence Studies National Professional Organisation Website: The Institute of Chartered Accountants in England & Wales National Professional Organisation Website: Chartered Institute of Management Accountants National Professional Organisation Website: The Association of Chartered Certified Accountants National Professional Organisation Website: The Chartered Institute of Public Finance and Accountancy National Professional Organisation Website: The Institute of Chartered Accountants of Scotland National Professional Organisation Website: Association of Accounting Technicians Standard Setter Website: United Kingdom Accounting Standards Board (ASB) Response to IFAC Member Body Survey on Standard Setting and Regulation Update for January 2010 Update for November 2009 Update for October 2009 Update for August 2009 Update for July 2009 Update for June 2009 Update for May 2009 Update for March 2009 Update for January 2009 Update for December 2008 Update for November 2008 Update for August 2008 Update for February 2008 Update for October 2007 Update for April 2006 Update for February 2006 Update for January 2006 Update for December 2005 Update for May 2005 Update for April 2005 Update for April 2004 Update for July 2003 Update for April 2003 Update for January 2003 Update for July 2002 Update for May 2001 London: Financial Reporting Framework in the United Kingdom Adoption of IFRSs in Europe Effective in 2005 In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. EU countries have the option to: Require or permit IFRSs for unlisted companies. Require or permit IFRSs in parent company (unconsolidated) financial statements. Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007. Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007. The European IAS regulation applies not only to the 27 EU Member States but also to the three members of the European Economic Area (EEA) – Iceland, Liechtenstein, and Norway. The United Kingdom is an EU Member State. Consequently, UK companies listed in an EU/EEA securities market will follow IFRSs starting in 2005. In January 2005, the European Commission published the results of a survey of the 25 EU member states and the 3 EEA member states on their plans regarding the four options above. For information on each country's plans, click to download: Table on Use of IFRS Options in 27 Member and 3 EEA States (PDF 52k) The European Commission has adopted the following wording for use in the notes to the accounts and in the audit reports of companies subject to EU Regulation 1606/2002/EC (the 'IAS regulation'): "in accordance with International Financial Reporting Standards as adopted by the EU" or "in accordance with IFRSs as adopted by the EU". The UK Auditing Practices Board also requires companies subject to the IAS regulation to state, in a footnote, compliance with IFRSs as adopted by the IASB, if that is the case. Companies Not Subject to the EU IAS Regulation Companies listed on the Alternative Investment Market (AIM) of the London stock exchange are not subject to the EU IAS Regulation. The AIM has adopted a rule that will require AIM companies to submit IFRS financial statements starting in 2007. All other UK companies, for their consolidated financial statements, are permitted to use IFRSs or to follow the accounting principles established by the United Kingdom Accounting Standards Board, as follows: Companies other than SMEs Unlisted companies other than SMEs must follow: Financial Reporting Standards (FRS) issued by the UK Accounting Standards Board (ASB) Statements of Standard Accounting Practice (SSAPs) adopted by the UK Accounting Standards Board UITF Abstracts issued by the Urgent Issues Task Force (UITF) of the UK Accounting Standards Board Small Unlisted Entities Small companies may elect to report under the Financial Reporting Standard for Smaller Entities (FRSSE), which gives exemptions from applying all other accounting standards. Deloitte iGAAP Publications on Financial Reporting in the UK Deloitte & Touche LLP (United Kingdom) have developed a series of publications on financial reporting in the UK, including: iGAAP 2009 – IFRS reporting in the UK iGAAP 2009 – A guide to IFRS reporting iGAAP 2009 – Financial statements for UK listed groups iGAAP 2008 – Financial instruments: IAS 32, IAS 39 and IFRS 7 explained ukGAAP 2009 – Financial reporting for UK unlisted entities ukGAAP 2009 – Financial statements for UK unlisted groups Each of these can be purchased through Lexis-Nexis online at www.lexisnexis.co.uk/deloitte or call +44 (0) 845 370 1234. There is more information in this Brochure (PDF 246k) Stay Tuned Online: Internet-Based IFRS and UK Financial Reporting Updates The Deloitte London IFRS Centre of Excellence is running a series of hour-long Internet-based financial reporting updates, aimed at helping finance teams keep up to speed with IFRS and other financial reporting issues. Each update lasts no more than an hour, and sessions are held three times a year, approximately at the end of March, July and November. We intend to keep a recording of each session available on this website for a period of at least four months from the date of the presentation. Thereafter, recordings may be removed without notice. Now available: November 2009 Topics included: IFRS 9 Financial Instruments ED/2009/12 Financial Instruments: Amortised Cost and Impairment Classification of Rights Issues: amendment to IAS 32 IAS 24 Related Party Disclosures (revised 2009) A round up of other UK reporting matters Other IFRS developments and summaries for December 2009 To access the recording Click Here. July 2009 Topics included: IFRS for Small and Medium-sized Entities ED 2009/5 Fair-value Measurement DP2009/2 Credit Risk in Liability Measurement IAS 39 The Sequel ED 2009/6 Management Commentary FRS 30 Heritage Assets and other UK developments Other IFRS Developments To access the recording Click Here (35.4mb WMV). When you click on this link, what happens will depend on how your computer is configured. The webcast may open directly in your media player, or you may be asked whether you want to open or save the file, or you may only be given a choice to save the file. You can play a saved file by clicking on it. May 2009 Topics included: ED Income Tax ED Derecognition: proposed amendments to IAS 39 and IFRS 7 DP Preliminary Views on Revenue Recognition in Contracts with Customers DP Leases: Preliminary Views. To access the recording Click Here. March 2009 Topics included: latest developments in IFRSs three current IASB projects: consolidation, revenue recognition, leases IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfers of Assets from Customers going concern and liquidity risk UK developments To access the recording Click Here. November 2008 Topics included: Amendments to IAS 39 and IFRS 7: Reclassification of financial assets Improving disclosure of financial instruments IASB educational guidance Companies Act 2006 implementation update Current trends in annual reports Financial Reporting Review Panel update Latest developments in IFRSs To access the recording Click Here. (Please note that a small amount of audio is missing at the start of the penultimate session.) July 2008 Topics included: IFRIC 15 Agreements for the Construction of Real Estate and IFRIC 16 Hedges of a Net Investment in a Foreign Operation Update on implementation of the Companies Act 2006 Latest Financial Reporting Review Panel developments The impact of Improvements to IFRSs issued in May 2008. To access the recording Click Here. Background: Financial Reporting in the United Kingdom We have prepared a comprehensive page of background information on financial reporting in the United Kingdom. Click to Open in a New Window. UK Accounting Standards Board Inside Track Newsletters Here is the link to view or download UK Accounting Standards Board Inside Track Newsletters. January 2010 Update We urge UK ASB to adopt quickly the IFRS for SMEs Deloitte UK has asked the UK Accounting Standards Board (ASB) to make the IFRS for SMEs available quickly to preparers to adopt on a voluntary basis as an alternative to current UK GAAP. Deloitte's letter was sent in response to the ASB's Consultation Paper on the Future of UK GAAP, which proposes to replace UK GAAP with the IFRS for SMEs starting in 2013. Our view is that it should be available as an option sooner. Our letter said that UK GAAP has become unwieldy and confusing and there has been uncertainty over its future for too long. The Deloitte submission to the ASB may be downloaded: From the ASB Website ( http://www.frc.org.uk/asb/technical/projects/resposes_policy.cfm) or Here on IAS Plus (PDF 3,844k). The closing date for responses to the ASB is 1 February 2010. IASB Chairman will become ICAS President Sir David Tweedie, Chairman of the International Accounting Standards Board, has been nominated as Vice-President of The Institute of Chartered Accountants of Scotland (ICAS). The ICAS Announcement (PDF 47k) said the appointment "is in recognition of Sir David's outstanding contribution to the accountancy profession and to ICAS, and is made with a view to his becoming President of the Institute in 2012. Sir David retires from the IASB on 30 June 2011". The role of Vice-President is unpaid, and will not interfere in any way with Sir David's IASB responsibilities. Concerns about implementation of IFRS 3 The United Kingdom Financial Reporting Council (FRC) has issued a study Accounting for Acquisitions (PDF 223k) examining the quality of accounting and reporting under IFRS 3 Business Combinations. Companies told the FRC that acquisition accounting is costly and difficult, and at the same time investors said that the resulting information is not useful. The FRC found that IFRS 3 "has been poorly applied by companies due to unfamiliarity with its requirements and the complexity of valuing intangible assets such as brands and customer relationships". The study found that companies had "provided insufficient or inconsistent information about material acquisitions in their audited accounts when compared to the rationale for these acquisitions and supporting explanations given in their business reviews". The FRC intends to follow up on this study over the next 18 months and to provide feedback to the IASB. The FRC is the UK's independent regulator responsible for promoting confidence in corporate reporting and governance. Concerns about implementation of IFRS 8 The United Kingdom Financial Reporting Review Panel (FRRP) has issued a Statement FRRP Highlights the Challenge of Implementing New Segmental Reporting Requirements (PDF 36k) expressing concern about how companies are reporting the performance of key parts of their business in the light of the introduction of IFRS 8 Operating Segments. IFRS 8 requires companies to provide an analysis of profit, assets, and liabilities so that investors can see the performance of the principal operations or 'segments'. The FRRP reviewed a sample of 2009 interim accounts and 2008 annual accounts and has asked a number of questions about the implementation of IFRS 8, in particular, where: only one operating segment is reported, but the group appears to be diverse with different businesses or with significant operations in different countries; the operating analysis set out in the narrative report differs from the operating segments in the financial statements; the titles and responsibilities of the directors or executive management team imply an organisational structure which is not reflected in the operating segments; or the commentary in the narrative report focuses on non-IFRS measures whereas the segmental disclosures are based on IFRS amounts. In its statement, the Panel encourages Boards of Directors to test their initial conclusions about their segmental reporting by considering the following questions: What are the key operating decisions made in running the business? Who makes these key operating decisions? Who are the segment managers (as defined in the standard) and who do they report to? How are the group's activities reported in the information used by management to review performance and make resource allocation decisions between segments? Is any proposed aggregation of operating segments into one reportable segment supported by the aggregation criteria in the standard, including consistency with the core principle? Is the information about reportable segments based on IFRS measures or on an alternative basis? Have the reported segment amounts been reconciled to the IFRS aggregate amounts? Do the accounts describe the factors used to identify the reportable segments including the basis on which the company is organised? November 2009 Update By All Accounts – New ICAEW Journal The Financial Reporting Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) has published the first edition of its new journal By All Accounts. The theme of this issue (dated January 2010) is IFRS for All? Financial reporting by entities of every shape and size is at a crossroads. Three articles in this issue focus on the IFRS for SMEs. Others deal with the following issues, among others: the politics of accounting, directors' duties under the law, IFRSs in transition, writing 'the front half' of the annual report, and IFRSs in central government. By All Accounts is copyright by the ICAEW and is posted on IAS Plus with their kind permission. Click to: Download By All Accounts – Issue 1, January 2010 (PDF 1,240k) Go to Financial Reporting Faculty Website Make IFRS for SMEs available in UK 'almost immediately' In an article titled Decision Time published in CA Magazine, Deloitte UK partner Isobel Sharp argues that the United Kingdom and Ireland should make the IFRS for SMEs available almost immediately. The UK Accounting Standards Board has already indicated its intent to replace UK Financial Reporting Standards with the IFRS for SMEs, effective in 2012. "Perhaps only a few would change in 2010," she writes, "but it would be their choice. On the ASB timetable an exposure draft is due to be issued in 2010, with the standard following in 2011, only a matter of months before the January 2012 implementation date.... The techies may be relied on to raise the tedious. But are there any real hurdles? In short, the only question is 'What is best for business?'" Click to Download Decision Time by Isobel Sharp (PDF 309k). UK ASB pension accounting study The United Kingdom Accounting Standards Board (ASB) has issued a report The Financial Reporting of Pensions: Feedback and Redeliberations. The objective is to provide the IASB with recommendations on matters it might consider in developing a future financial reporting standard on pensions. The report is being published under the Pro-active Accounting Activities in Europe (PAAinE) initiative by the ASB, EFRAG, and the accounting standards boards of Germany and France. The recommendations are, however, only those of the ASB. The report is a follow-up to a discussion paper issued by the ASB in January 2008 and sets out the ASB's redeliberations and recommendations after consideration of the 103 responses to the discussion paper. Some key recommendations of the ASB: Recognition should be based on the principles of reflecting only present obligations as liabilities. The liability to pay benefits that is recognised (and the pension expense for each period) should be based on current salaries plus any future increases that are required by law or contract including other increases that are seen as nondiscretionary (ie there is a constructive obligation). Pension plans should be subject to the same principles of consolidation as are usually applied in determining whether one entity controls another. Pension assets and liabilities should be recognised immediately, but recognition of the changes in assets and liabilities relating to pension benefits are inextricably linked to the presentation of those changes in the financial statements. Future cash flows used to measure the liability to pay pension benefits should be: explicit; based on observable market prices that are adjusted to take into consideration entity-specific circumstances; incorporate in an unbiased way all available information about the amount, timing and uncertainty of cash-flows arising from the contractual obligations; and current – they correspond to conditions at the end of the reporting period. The liability to pay pension benefits should not be reduced to reflect an entity's credit risk. In measuring liabilities, the discount rate used should reflect the time value of money, and therefore should be a risk-free rate. Assets held to pay pension benefits should be reported at current values. Click for: ASB Report: The Financial Reporting of Pensions: Feedback and Redeliberations (PDF 1,409k) ASB Press Release (PDF 71k) October 2009 Update Deloitte's iGAAP 2010 IFRS Reporting in the UK Deloitte United Kingdom has published iGAAP 2010 IFRS Reporting in the UK. This 3,692-page book sets out comprehensive guidance for UK companies reporting under IFRSs. The book explains clearly the requirements of IFRSs and how they differ from UK GAAP; adds interpretation and commentary where IFRSs are silent or unclear; identifies related UK-specific requirements; and provides many illustrative examples. The manual deals comprehensively with those new standards that apply for periods beginning in 2009 and also covers those further pronouncements issued by the IASB up to 30 June 2009 that will apply from 2010, distinguishing clearly those that have not yet been endorsed by the European Commission. New material in this 2010 edition includes: IFRS 6 Exploration for and Evaluation of Mineral Resources; the revised version of IFRS 1 First-time Adoption of International Financial Reporting Standards (November 2008); the amendment to IFRS 2 Group Cash-settled Share-based Payment Transactions (June 2009); the amendment to IFRS 7 Improving Disclosures about Financial Instruments (March 2009); the amendment to IAS 39 Eligible Hedged Items (July 2008); the amendments to IAS 39 and IFRS 7 Reclassification of Financial Assets (October 2008); the amendments to IFRIC 9 and IAS 39 Embedded Derivatives (March 2009); Improvements to IFRSs issued in April 2009; IFRIC 17 Distributions of Non-cash Assets to Owners; IFRIC 18 Transfers of Assets from Customers; partnerships; small and medium-sized companies; dormant, overseas and unlimited companies and companies limited by guarantee; TECH 01/09 Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006; increased guidance on going concern following the publication of guidance in this area by the Financial Reporting Council; and additional examples and guidance on issues arising in practice. Orders may be placed via www.lexisnexis.co.uk/deloitte or call +44 (0) 845 370 1234. Click to Descriptive Booklet about This and Related iGAAP Publications for 2010 (PDF 248k). Deloitte UK survey of narrative reporting Deloitte United Kingdom has published A Telling Performance – Surveying Narrative Reporting in Annual Reports (PDF 4,325k). The survey analyses the narrative reporting of 130 UK listed companies, split into two categories – investment trusts and other companies. It includes a review of: how compliance with the disclosure requirements of the Companies Act 2006, the Listing Rules, the Disclosure and Transparency Rules, and the Combined Code varied; the extent to which companies have adopted the Financial Reporting Council's November 2008 guidance on going concern. In this respect its publication is timely as the FRC has published recently its revised guidance, which will be effective for 31 December 2009 period ends; and the use of the ASB's Reporting Statement: Operating and Financial Review. The main findings for companies other than investment trusts are: the length of the annual report has increased by 3% compared with 2008 and by 41% compared with 2005. 62% of those companies that reported after the November 2008 FRC Update on going concern and liquidity risk was published clearly took on board voluntarily the guidance therein. nine companies (2008: five) had received modified audit reports, seven (2008: four) of which related to group going concern. Another one related to a subsidiary going into administration post year-end; three areas saw dramatic increases compared with 2008: 83% (2008: 47%) discussed their capital structure and financing 68% (2008: 48%) discussed treasury policies 47% (2008: 22%) discussed their current and prospective liquidity 96% of companies (2008: 89%) clearly described their principal risks and uncertainties. Companies disclosed eight risks on average, with one FTSE 350 company identifying 30. The state of the economy was the most commonly noted risk; 84% of companies (2008: 77%) identified clearly their key performance indicators. UK ASB review of narrative reporting in the UK The United Kingdom Accounting Standards Board (ASB) has published Rising to the Challenge, the report of its review of the narrative reporting of 50 UK listed companies in 2008 and 2009. The review focused on: how companies are complying with the enhanced business review content requirements from the Companies Act 2006 (CA); effective communication and presentation of the required content; and areas that are leading to clutter in narrative reporting. The review found that most companies are providing a good standard of information in their financial reviews, the description of objectives and strategies, and the provision of financial key performance indicators (KPIs). However, there are significant opportunities for improvement in the reporting of principal risks, trends and factors, contractual and other arrangements, and non-financial KPIs. Click to download: Review of Narrative Reporting by UK Listed Companies: Key Findings (PDF 196k) Review of Narrative Reporting by UK Listed Companies: Full Report (PDF 434k) August 2009 Update Archive available for webcast debate on IAS 39 On 6 August 2009 Deloitte hosted a live webcast with the IASB on their proposals to replace IAS 39 Financial Instruments: Recognition and Measurement. The webcast included John Smith, IASB Board member; Gavin Francis, IASB Director of Capital Markets; Sue Lloyd, IASB Senior Technical Consultant; Jens Berger, IASB Practice Fellow; Veronica Poole, Deloitte, Head of UK IFRS Centre of Excellence; Andrew Spooner, Deloitte, Lead Financial Instrument Partner. A recording of the webcast is available Here. Proposal to adopt IFRS for SMEs in place of UK FRSs The United Kingdom Accounting Standards Board (ASB) has issued a consultation paper Policy Proposal: the Future of UK GAAP, which sets out its proposals for the future reporting requirements for UK and Irish entities. The Board is proposing a three-tier approach to developing UK GAAP converged with IFRSs as follows: Tier 1 – publicly accountable entities would apply IFRSs as adopted by the EU. Tier 2 – all other UK entities, except those that elect to apply the Financial Reporting Standard for Smaller Entities (FRSSE), would apply the IFRS for SMEs. Tier 3 – small entities could choose to continue to apply the FRSSE if they do not exceed two or more of the following criteria: turnover £6,500,000; balance sheet total £3,260,000; and average number of employees 50. Entities in Tier 2 and Tier 3 would have the option of using EU-adopted IFRSs if they wished, and those in Tier 3 would have the option of using the IFRS for SMEs. The ASB has been working with the UK Department for Business Innovation and Skills (BIS) in developing these proposals. The proposals envisage a reporting regime based on public accountability, broadly in line with the IASB's definition in the IFRS for SMEs, which states that entities do have public accountability if they (a) trade their debt or equity instruments in a public market or (b) hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses. The consultation paper explores whether constituents would prefer to retain the current legal definition of public accountability. This would imply, for example, that all large entities are publicly accountable, and so should be required to follow EU adopted IFRSs. The paper also sets out what the Board sees as the impact of its proposals for public-benefit entities. Announcing the issue of the consultation paper, Ian Mackintosh, Chairman of the ASB, said: 'For a number of years, the Board has stated that, in the medium term, there is no case for the use of two different accounting frameworks in the UK. The recent publication by the IASB of its IFRS for SMEs provides the Board with the opportunity to consult on what we see as the future framework for financial reporting by UK and Irish entities. I would urge all interested parties to consider the proposals and let us have their views'. The ASB is seeking comments on the proposals by 1 February 2010. If the proposal is adopted, the 'change' date is planned for financial years beginning on or after 1 January 2012. Click to Download the Consultation Paper (PDF 492k). Financial instruments classification and measurement newsletter Deloitte LLP (UK) has issued a Comprehensive Newsletter - Time for New Measures (PDF 241k) on the IASB's proposals to replace the financial instruments classification and measurement requirements in IAS 39. The newsletter includes an illustrative statement of financial position for a corporate, bank, and insurer showing the potential impact of the proposals compared with the current classification and measurement requirements. Moving to the IFRS for SMEs in the UK Since 2005, listed groups in the United Kingdom have been required to prepare their consolidated financial statements using IFRSs. Almost all other groups have a choice. They can use IFRSs, UK GAAP as developed by the UK Accounting Standards Board (ASB), and if they are small they have a further option of using the Financial Reporting Standard for Smaller Entities (FRSSE). But from 2012, the options are expected to change. UK GAAP is expected to be replaced with the IFRS for Small and Medium-sized Entities. Deloitte (United Kingdom) has published a newsletter Choosing Your GAAP: Planning for the Proposed Removal of UK GAAP (PDF 236k) explaining the ASB's plan. The newsletter examines the choices and explains the key areas of accounting and tax impact, and provides guidance on planning for the change. Survey of interim management statements in the UK Deloitte (United Kingdom) has published In Many Styles – The second year's interim management statements. This publication considers how UK listed companies have met the requirements for an interim management statement in the second year of compliance with the Disclosure and Transparency Rules . In particular, it surveys interim management statements of UK listed companies (including separate consideration of investment trusts), reviews compliance with the requirements and compares the findings to the 2008 Deloitte publication First IMpressionS. Click to download In Many Styles – The Second Year's Interim Management Statements (PDF 627k). July 2009 Update FRC CEO argues: do not change the fundamental purpose of accounting Paul Boyle, Chief Executive of the UK Financial Reporting Council (FRC), argued in a speech to the FRC Annual Open Meeting against proposals to use accounting as a public policy tool to reduce pro-cyclicality and challenged the proposition that accounting measures that show volatility should be adjusted to create an impression of stability. Mr Boyle also warned that the risks to confidence in corporate reporting and governance remained higher than normal and that there was no room for complacency. Click to Download Mr Boyle's Remarks (PDF 98k). Here is an excerpt: It is not clear that accounting has the potential to be a public policy tool to reduce pro-cyclicality, or that it would be appropriate to use it in this way. An equally, or perhaps even more, dangerous argument now gaining currency is that accounting should be given an explicit role in promoting financial stability, rather than its traditional role of providing information useful to investors in their decision-making. The implication of this view is that accounting measures that show volatility should be adjusted to create an impression of stability. Accounting is a measurement system that presents the financial performance and position of a company in as neutral a way as possible. It is not surprising that banks report substantial profits when the economy is doing well and reduced profits, or even losses, when the economy is doing badly. This is accounting reflecting the economic cycle, which is a good characteristic of a financial measurement system. It is worth considering the dangers of altering measurement systems to make them less pro-cyclical. It could be argued, for example, that unemployment statistics and house prices have damaging pro-cyclical effects. Yet no-one seriously argues that it would be in the public interest for these statistics to be adjusted because the public cannot be trusted to react in a way consistent with financial stability. This is not to say that current accounting standards need no improvement. But the merits of proposed 'improvements' need to be assessed against a clear understanding of the purposes of accounting. It may well be appropriate to attempt to reduce the volatility of economic cycles, but there are more appropriate tools than accounting to achieve this. June 2009 Update Making financial reports less complex and more relevant The Financial Reporting Council (FRC), the United Kingdom's independent financial reporting regulator, has published a discussion paper arising from its project on reducing complexity in corporate reporting. The paper – titled Louder than Words: Principles and Actions for Making Corporate Reports Less Complex and More Relevant seeks to address growing concerns about the complexity of corporate reporting. The paper recommends eight guiding principles for reducing complexity: four for better communication in reports and four for improving the quality and effectiveness of regulations. The paper also makes five calls for action where the FRC believes further investigation may lead to opportunities for reducing complexity. These are: Cash flow and net debt reporting: could this be better aligned with user needs such as by including a net debt reconciliation? Wholly owned subsidiaries reporting requirements: could we find ways to reduce the reporting burden such as by reducing the filing or disclosure requirements? Cut clutter: could preparers reduce immaterial information (with the support of regulators) that may be undermining the quality of reports? Disclosures: could we overhaul the process for creating disclosures and provide guidance about when they can be deleted as not relevant? IFRSs: could we improve usability through logical organisation and clearer articulation of the desired outcomes for each standard? The FRC is hoping that the discussion paper will lead to debate within the UK and global financial reporting communities. The FRC has invited comments on its paper from a wide range of constituents by 30 October 2009. Click to download (copyright FRC and posted on IAS Plus with their kind permission): Louder than Words: Full Report (PDF 294k) Executive Summary (PDF 160k) May 2009 Update UK Parliament Committee defends 'mark-to-market' A report from the United Kingdom House of Commons Treasury Committee has concluded that bad decisions at banks – not accounting rules – caused the global financial crisis. The report, titled Banking Crisis: Reforming Corporate Governance and Pay in the City, makes the following points, among others: Fair value accounting Fair value accounting has led to banks publishing some very dispiriting financial results, but this is because the news itself has been bad, not the way in which it has been presented. The uncomfortable truth for banks is that market participants had overinflated asset prices which have subsequently corrected dramatically. Fair value accounting has actually exposed this correction, and done so more quickly than an alternative method would have done. Important features of accounting frameworks are that they encourage transparency and consistency across firms and asset classes. But it is a bridge too far to expect them to also lead to intelligent decision-making. We do not consider fair value accounting to be a suitable scapegoat for the hubris, poor risk controls and bad decisions of the banking sector. EU modifications of IFRSs We regret the power of the European Commission to pick and choose which international accounting standards should be implemented in the EU and call on the Treasury to consider the impact of the Commission's powers on the objective of establishing a single global set of accounting standards. Click for: Treasury Committee Report (PDF 1,819k) Comprehensive Credit Crunch Resources on IAS Plus March 2009 Update UK Financial Reporting Faculty The new Financial Reporting Faculty, launched by the Institute of Chartered Accountants in England and Wales in December 2008, has recruited its first 1,000 members. The Faculty, chaired by Deloitte partner Andy Simmonds, is open to all and offers free access to eIFRS, the ability to create and comment on topical issues through a blog platform, and substantial IFRS resources including a Standards Tracker which monitors and hotlinks to different versions of IFRS standards. More information at the Faculty Website. January 2009 Update New UK Financial Reporting Faculty The Institute of Chartered Accountants in England and Wales has created a Financial Reporting Faculty 'in response to fundamental changes in the financial reporting environment and the increasing complexity of relevant laws and standards'. The goal of the Faculty is to help members keep up-to-date and understand the implications of new standards, regulations, and practice in financial reporting. Members of the Faculty get access to: The Faculty website – a peer-to-peer platform encouraging the sharing of news, uncertainties, concerns, and possible solutions Faculty factsheets – practical assistance on UK GAAP and IFRS written by experts in the field All of the most up-to-date material issued by the IASB – the full IASB 'eIFRS' subscription service The 'Standards tracker' – an online facility for checking current standards and recent amendments Discounts on ASB standards and other financial reporting publications and UK courses Specialised training and CPD services, including e-learning and online resources Deloitte UK partner Andy Simmonds chairs the board of the Faculty. For more information on the benefits of membership or to join the Faculty visit www.icaew.com/frf. December 2008 Update Survey of UK IFRS financial reports Deloitte (United Kingdom) has published Right to the end – Surveying financial statements in annual reports. The publication looks at what UK listed companies are reporting in the financial sections of their annual reports published between 1 August 2007 and 31 July 2008. The publication is based on a survey of the financial statements of 130 listed companies, split into two categories – 30 investment trusts and 100 other companies. It includes a review of: how compliance with disclosure requirements and the accounting policy choices made under IFRSs varied; the level of variety in the presentation of primary statements; and which critical judgements and key estimations directors consider to be the most significant. The report includes detail of some current disclosure requirements and latest developments, as well as various 'good practice' examples. Click to download Right to the End - Surveying Financial Statements in Annual Reports (PDF 3.640mb) Here are a few findings of the study: 5% of the companies had a modified audit opinion 51% of the companies presented additional non-GAAP performance measures on the face of the income statement 14% of the companies did not identify any key sources of estimation uncertainty or areas of critical judgements in their financial statements 88% of the companies had share option schemes, and 61% had continuing exposure to defined benefit obligations November 2008 Update Credit crunch challenges for directors The United Kingdom Financial Reporting Council (FRC) has published two alerts to directors on the corporate reporting challenges arising from current economic conditions. Because of the global liquidity squeeze, directors and audit committees may need to spend more time planning the year-end activities, reviewing key assumptions and models used in financial reporting, and reviewing the significant accounting and disclosure judgements. In response to those challenges, the FRC has published: Challenges for Audit Committees Arising from Current Economic Conditions (PDF 205k) An Update for Directors of Listed Companies: Going Concern and Liquidity Risk (PDF 280k) The purpose of the documents is to assist directors by identifying key questions that they may wish to consider when preparing for the year-end and in meeting their responsibilities in relation to annual reports and accounts. These documents do not impose any new requirements on UK companies or their auditors. These publications are copyright by the FRC and are posted on IAS Plus with the kind permission of the FRC. August 2008 Update Deloitte UK study on the first year's interim management statements Deloitte & Touche (United Kingdom) has published First Impressions: The First Year's Interim Management Statements. This publication considers how UK listed companies have implemented the new requirements for a twice-yearly interim management statement (IMS) in the first year of compliance with the UK Disclosure and Transparency Rules (DTR) (which is based on the European Transparency Obligations Directive). In particular, it surveys interim management statements of UK listed companies (including separate consideration of investment trusts), reviews compliance with the new rules, and contains illustrative and real life example IMSs as well as an IMS disclosure checklist. Click to download: First Impressions Study (PDF 6,706k) Press Release (PDF 27k) February 2008 Update Deloitte UK study on half-yearly reporting A Deloitte & Touche (United Kingdom) study has found that many companies are failing to comply fully with new reporting requirements for half-yearly financial reports following the UK's introduction of the EU's Transparency Obligations Directive (TOD). Deloitte's report, titled Half a story, considers the impact of the TOD, which introduced more detailed and extensive requirements for half-yearly financial reports, including compliance with IAS 34 and shorter reporting deadlines. The report also includes some comparisons with the findings of previous Deloitte studies of half-yearly reporting in 2002, 2004, and 2006. The key findings of the report include: Of 289 companies surveyed, 72 (25%) failed to provide a responsibility statement in their half-yearly reports. This is now a requirement for all listed companies; The average length of the half yearly financial report has increased by 27%; The risks and uncertainties disclosures, which focus on the second six months of the year, were handled well by 19 of 30 companies reviewed in detail. Only four companies referred to credit crunch issues, three in relatively general terms and only one in respect of indebtedness following a refinancing not apparently caused by credit market tightening; Nine of these 30 companies (30%), did not comply with the requirements of IAS 34. This was mainly due to missing disclosures on segments, accounting policies and earnings per share; and Only one of the 30 companies clearly followed all of the requirements in the DTR and IAS 34. Click for: Full Report: Half a Story (PDF 1,699k) Deloitte News Release (PDF 26k) Survey of IFRS presentation and disclosure practices in UK Deloitte & Touche (United Kingdom) has surveyed the presentation and disclosure practices under IFRSs of 100 UK listed companies, based on annual reports published between August 2006 and July 2007. The objectives of the survey were to determine: How the disclosure requirements of IFRSs are interpreted in practice The underlying trends in presentation of IFRS financial statements The extent to which the format is still influenced by UK GAAP reporting requirements Among the issues illustrated in the report are: What is included in operating profit Non-GAAP performance measures Choice of SORIE or SOCIE in reporting changes in equity Classifications in the cash flow statement Accounting policy disclosures Disclosures of critical judgements and key sources of estimation uncertainty Segment reporting Defined benefit pension plans Impairments Associates and joint ventures Click to download a Summary of Survey Findings (PDF 747k). UK government will use IFRSs starting 1 April 2008 The budget and the accounts of the Government of the United Kingdom will be prepared using IFRSs starting with the financial year that begins 1 April 2008. One of the biggest changes from moving to IFRSs is expected to be the inclusion of all of the Government's long-term liabilities in the statement of financial position. The UK Government Resources and Accounts Act 2000 requires that 'Whole-of-Government' accounts (consolidating the entire UK public sector, eventually including local councils) should be prepared to present a 'true and fair view' and to 'conform to generally accepted accounting practice': Whole of Government Accounts Website HM Treasury Financial Reporting Web Page IFRS-based UK Government Financial Reporting Manual Website Website of Financial Reporting Advisory Board (FRAB), the Government's accounting advisor. FRAB IFRS Announcement March 2007 (PDF 17k) FRAB IFRS Announcement June 2007 (PDF 27k) October 2007 Update Report on choice in the UK audit market The United Kingdom Financial Reporting Council (FRC) has published the final report of the Market Participants Group that has advised the FRC on its Choice in the UK Audit Market project. The Group was established in October 2006 to provide advice to the FRC on possible actions that market participants (that is, companies, investors and audit firms) could take to mitigate the risks arising from the characteristics of the market for audit services to public interest entities in the United Kingdom. The Grou's recommendations are summarised below. Click for: Report of the Market Participants Group (PDF 317k) Press Release (PDF 22k) Summary of Recommendations on Choice in the UK Audit Market: The FRC should promote wider understanding of the possible effects on audit choice of changes to audit firm ownership rules, subject to there being sufficient safeguards to protect auditor independence and audit quality. Audit firms should disclose the financial results of their work on statutory audits and directly related services on a comparable basis. In developing and implementing policy on auditor liability arrangements, regulators and legislators should seek to promote audit choice, subject to the overriding need to protect audit quality. Regulatory organisations should encourage participation on standard setting bodies and committees by appropriate individuals from different sizes of audit firms. The FRC should continue its efforts to promote understanding of audit quality and the firms and the FRC should promote greater transparency of the capabilities of individual firms. The accounting profession should establish mechanisms to improve access by the incoming auditor to information relevant to the audit held by the outgoing auditor. The FRC should provide independent guidance for audit committees and other market participants on considerations relevant to the use of firms from more than one audit network. The FRC should amend the section of the Smith Guidance dealing with communications with shareholders to include a requirement for the provision of information relevant to the auditor selection decision. When explaining auditor selection decisions, Boards should disclose any contractual obligations to appoint certain types of audit firms. Investor groups, corporate representatives, auditors and the FRC should promote good practices for shareholder engagement on auditor appointments and re-appointments. Authorities with responsibility for ethical standards for auditors should consider whether any rules could have a disproportionately adverse impact on auditor choice when compared to the benefits to auditor objectivity and independence. The FRC should review the Independence section of the Smith Guidance to ensure that it is consistent with the relevant ethical standards for auditors. Regulators should develop protocols for a more consistent response to audit firm issues based on their seriousness. Every firm that audits public interest entities should comply with the provisions of a Combined Code-style best practice corporate governance guide or give a considered explanation. Major public interest entities should consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning. April 2006 Update ICAS Report on 'Principles versus Rules' The Institute of Chartered Accountants of Scotland (ICAS) has published a report Principles Not Rules: A Question of Judgement. The report is the culmination of an ICAS working group project to help find a resolution to the 'principles versus rules' debate within international accounting standard setting. The report concludes that: A principles-based approach to standard setting is not only desirable but essential, to serve the needs of business and the public interest and that the global convergence of accounting standards cannot be achieved by a detailed rules-driven approach. The working group believes that principles-based standard setting will require: a change in the global profession, with preparers and auditors assuming more responsibility for their judgements; the documentation of key judgements in the financial statements; and regulators accepting a range of judgement-based outcomes. The working group believes that rules-based accounting adds unnecessary complexity, encourages financial engineering and does not necessarily lead to a 'true and fair view' or 'fair presentation'. Copies of the report are available on the ICAS Website. Also available are a literature review and summary of proceedings of ICAS workshops. February 2006 Update Accounting for 'Heritage Assets' The United Kingdom Accounting Standards Board (ASB) has published a Discussion Paper Heritage Assets: Can Accounting Do Better? setting out proposals to improve the consistency and transparency of the financial reporting of heritage assets. The proposals will be relevant to entities such as museums holding collections of art, antiques, and books and also to entities that own and manage landscape or buildings for their environmental or historical qualities. The report concludes that the best financial reporting requires heritage assets to be reported as assets at current value, and the paper makes proposals to facilitate that approach. However, it offers an alternative approach for those entities that face genuine difficulties in valuing their heritage assets. Illustrative disclosures are included. Click to download: ASB Discussion Paper (PDF 365k) Press Release (PDF 19k). The ASB requests comments by 31 May 2006. January 2006 Update Financial Reporting The ASB issued the following standards (all based on the relevant IFRS/IAS) in the fourth quarter of 2005: Amendment to FRS 23 (IAS 21) The Effects of Changes in Foreign Exchange Rates - implements the recent change made to IAS 21. (21/12/2005) FRS 29 (IFRS 7) Financial Instruments: Disclosures. (09/12/2005) Amendment to FRS 26 Financial Instruments: Measurement - implements in full in FRS 26 the following amendments to IAS 39: transition and initial recognition of financial assets and financial liabilities; cash flow hedge accounting of forecast intragroup transactions; the fair value option; and financial guarantee contracts and credit insurance. (28/10/2005) Following Chancellor Gordon Brown's announcement in late November, the government has repealed the statutory requirement that companies publish an Operating and Financial Review. Auditing The APB has issued final guidance for auditors on first-time application of IFRSs in APB Bulletin 2005/03 Guidance for Auditors on First-time Application of IFRSs in the United Kingdom and the Republic of Ireland. Also, the European Commission has adopted Standard Wording for European companies to refer to compliance with IFRSs in audit reports and notes to the financial statements. This wording differs slightly from the one published by the APB in Bulletin 2005/04 Auditor's Reports on Financial Statements in Great Britain and Northern Ireland. Both wordings are acceptable and the electronic versions of the two Bulletins will be amended to include the EC wording as an alternative by way of a footnote. December 2005 Update New UK Actuarial Standards Board under FRC The Financial Reporting Council, under which the United Kingdom Accounting Standards Board operates, has established a new regime to set actuarial standards and oversee the regulation of the actuarial profession. The UK government is supporting this effort. The FRC has created a Board for Actuarial Standards (BAS) whose mission is to set high quality actuarial standards independently of the actuarial profession or other interests. The FRC is also extending the remit of the Professional Oversight Board for Accountancy to oversee the regulation of the actuarial profession; and is extending the remit of the Accountancy Investigation and Discipline Board to cover public interest cases involving actuaries. The FRC has appointed Paul Seymour as Chair of the BAS. Click for Press Release. The FRC has added to its website a New Section on Regulation of the Actuarial Profession. May 2005 Update Problem with IAS 27 for UK Companies The Institute of Chartered Accountants in England and Wales (ICAEW) has submitted to the IASB and others a briefing paper on a problem in applying IAS 27 Consolidated and Separate Financial Statements by companies in the United Kingdom (and, most likely, elsewhere). IAS 27 requires investors to recognise income from a subsidiary "only to the extent that the investor receives distributions from accumulated profits of the investee arising after the date of acquisition". Any distributions received out of preacquisition profits are treated as a recovery of part of the cost of the investment. Because of the retrospective transition requirements of IFRS 1 for first-time adopters of IFRSs, "a parent company must examine all past distributions made by each of its subsidiaries to determine whether they were paid from pre-acquisition profits. Some parent companies have a substantial number of subsidiaries and will need to locate and examine data – which in some cases may no longer be available or obscured by intra-group reorganisations – from the date of the initial acquisition of the investment. In many cases this is likely to prove a highly onerous task." The ICAEW urges an early amendment to IFRS 1 to ease the burden. Click to Download the ICAEW Briefing Paper (PDF 29k). April 2005 Update Enforcement of accounting standards in UK The United Kingdom Financial Reporting Review Panel (FRRP) has reached agreements with both the UK Financial Services Authority and Inland Revenue, and also has adopted new operating procedures, all aimed at enhancing the enforcement of financial reporting standards in the UK. Those steps coincide with changes to the Companies Act to give the FRRP statutory power to require companies, directors, and auditors to provide documents, information, and explanations relevant to a question about whether accounts comply with reporting requirements. Link to the FRRP Press Release. Future Role of UK Accounting Standards Board The UK Accounting Standards Board (ASB) has published an exposure draft of its Policy Statement, Accounting Standard-setting in a Changing Environment: The Role of the Accounting Standards Board. The ED sets out, for consultation, the ASB's views on its future role, including its roles in: contributing to the development and implementation IFRSs, influencing EU policy on accounting standards, including the endorsement of IFRSs, achieving convergence of UK accounting standards with IFRSs, and providing guidance on applying IFRSs in the absence of guidance from IFRIC. Comments on the Exposure Draft are invited by 15 September 2005. Click to download the UK ASB Press Release (PDF 20k). You can Download the Exposure Draft from the UK ASB website (PDF 169k). Guidance for auditing first-time adoption of IFRSs The United Kingdom Auditing Practices Board (APB) has published further interim guidance (known as Draft Bulletin 2005/3) for auditors on first-time application of IFRSs in the United Kingdom and the Republic of Ireland. In August 2004 the had APB published preliminary guidance on issues that may arise when companies make the transition from UK/Irish GAAP to IFRSs. The new bulletin reflects a number of additional issues, including the auditor's review of interim financial information in the first year of adoption of IFRSs. The bulletin notes: In spite of the progress made in resolving many of the legal and regulatory issues there are some remaining uncertainties. In particular, the specific wording to be used in the auditor's report when describing the financial reporting framework is still under debate. The wording used in the draft Bulletin is "those IFRSs adopted for use in the European Union" but there is a continuing discussion within Europe on the best term to use. The APB favours a consistent approach to this matter within Europe and accordingly this Bulletin is being issued as interim guidance and the description of the financial reporting framework used in it may be changed if there is a European consensus for a different description. Click here for Press Release (PDF 25k). April 2004 Update Convergence of UK and International Accounting Standards In a Discussion Paper titled UK Accounting Standards: A Strategy for Convergence with IFRS, the UK Accounting Standards Board has set out its plans for the future of UK accounting standards in the light of the move to the mandatory use of International Financial Reporting Standards for the consolidated accounts of EU listed companies. Issuance of the ASB's Discussion Paper coincides with a Government Consultation Document 'Modernisation of Accounting Directives/IAS Infrastructure'. The effect of the Government's proposals is that many companies will have the choice of using either UK accounting standards or IFRS. The Discussion Paper takes as its starting point that there can be no case, in the medium term, for the use of two sets of different accounting standards in the UK, and so UK accounting standards should be brought into line with IFRS. The ASB plans to do this whilst minimising the burden of change on those that choose to report under UK accounting standards. A phased approach is proposed including: new standards effective in 2005 and 2006 that will enhance existing UK financial reporting requirements, maintain their position as highly regarded internationally and adapt to changes in the law; and thereafter, a series of 'step changes' replacing one or more existing UK accounting standards with standards based on IFRS as prospective IASB projects are completed. One of the ASB's main objectives is to avoid requiring two changes of accounting policy in respect of the same issue within a short period. For this reason, it proposes the retention of a number of UK standards where the corresponding IFRS may change following completion of current IASB projects. The Discussion Paper sets out ASB's current intentions for new standards expected to become effective for accounting periods starting in 2005 and 2006, which are: Share options: FRS 20, based on IFRS 2 'Share-based Payment', requiring an expense measured at fair value to be recognised in the profit and loss account for all share-based payment transactions. This will be mandatory for listed companies in 2005 and for unlisted companies in 2006. Financial instruments: From 2005, standards based on IAS 32 'Financial Instruments: Disclosure and Presentation' and, for listed companies (and on a voluntary basis for other companies), much of IAS 39 'Financial Instruments: Recognition and Measurement'. Retirement benefits: FRS 17 will replace SSAP 24 in 2005 so that, consistent with IASB proposals for IAS 19 'Employee Benefits', actuarial gains and losses are fully recognised in the statement of total recognised gains and losses in the period in which they arise. Post balance sheet events: a standard based on IAS 10 'Events after the Balance Sheet Date', replacing SSAP 17 from 2005. Earnings per share: a UK standard (applicable to listed companies only) based on IAS 33 'Earnings per share' and replacing FRS 14 from 2005. Related party disclosures: a standard based on IAS 24 'Related Party Disclosures', replacing FRS 8 from 2006. In addition, the ASB may, after consideration of the responses to its Discussion Paper, issue exposure drafts for: a UK standard based on IAS 41 'Agriculture' available for use for accounting periods beginning on or after 1 January 2005; and revised disclosures in respect of operating lease commitments, based on those in IAS 17 'Leases'. The Paper also reviews the implications of the move to IFRS for the Financial Reporting Standard for Smaller Entities (FRSSE) and Statements of Recommended Practice ('SORPs'). Whilst the focus of the paper is on the future of UK accounting standards, it also describes the ASB's plans for its future role, including working with and influencing IASB and other international bodies, maintaining dialogue with its constituents and addressing UK accounting issues. ASB has requested comments by 30 June 2004. UK Consultation on Use of IFRSs by Unlisted Companies The United Kingdom Department of Trade and Industry has released a consultation document Modernisation of Accounting Directives/IAS Infrastructure (PDF 655k). DTI is seeking input on proposed changes to the UK 1985 Companies Act that would allow companies that are not already required by European law to follow IFRSs to choose IFRSs instead of UK GAAP in preparing their financial statements. Companies choosing the IFRS option would be able to reverse it only in limited circumstances. Parent companies would be required to ensure consistency of choice within the group unless there are good reasons against it. UK auditing board will adopt International Standards on Auditing The United Kingdom Auditing Practices Board is proposing to adopt the "complete suite" of International Standards of Auditing (ISAs) issued by the International Auditing and Assurance Standards Board. The APB notes that "in the aftermath of accounting and auditing failures in the US and Continental Europe, securities regulators and governments have recognised the value of harmonised auditing standards. In particular the European Commission is in the process of introducing an amended Directive on the statutory audit that will, in all probability, require the adoption of ISAs by all Member States." Link to the APB Announcement. July 2003 Update All UK Companies Will be Permitted to Use IFRS The United Kingdom Department of Trade and Industry (DTI) has approved a regulation that permits, starting January 2005, all British companies to use International Financial Reporting Standards as an alternative to UK accounting standards. European law already requires listed companies to use IFRS from 2005 in preparing their consolidated accounts. In the UK, that requirement will be extended so that, starting January 2005: publicly traded companies in the UK will also be permitted to use IFRS in their individual accounts; and other companies and limited liability partnerships in the UK will be permitted to use IFRS in both their individual and consolidated accounts. Click for Press Release (PDF 16k). Note: Although the press release states "UK Extends Use of International Accounting Standards", the DTI decided in March 2004 to publish a consultation paper and invite public comments on the matter. ICAEW Survey Shows Need for More Preparation for Transition to IFRS The Institute of Chartered Accountants in England and Wales has released results of a survey of its members (in both public practice and industry) to assess the level of awareness and preparation for the introduction of IFRS in 2005. Although the majority of members surveyed were aware of the move to IFRS, the survey showed that members generally were not aware of the extent of the impact that IFRS would have in the UK: A third of respondents had little or no awareness of the publication of the EU Regulation mandating the adoption of IFRS in 2005. q Less than half of respondents felt they were aware of the effect IFRS would have on their company or financial statements. Two-thirds of survey participants were either 'not very aware' or 'not aware at all' of the IASB's timetable for issuing both new and improved standards. Only 70% of respondents who had stated that IFRS was applicable to them felt that they would definitely be prepared in time for 2005. Only one in seven respondents were aware that the British government has issued a consultation paper on whether IFRS should apply to unlisted companies in the United Kingdom. The full survey report is available on the ICAEW's Website. Recently Issued Documents UITF Abstract 36, Contracts for Sales of Capacity Effective for years on or after June 2003. It deals with the issues arising, particularly in the telecommunications and electricity industries, where entities buy and sell capacity on each other's networks and sets out limited circumstances under which transactions in capacity should be reported as sales. Tech 7/03 Distributable profits Guidance on the determination of realised profit and losses in the context of distributions under Companies Act 1985, issued by ICAEW and ICAS, aims to identify, interpret and apply principles relating to the determination of realised profits and losses for the purposes of making distributions under the Companies Act 1985. It reflects the law and accounting standards in issue at 31 December 2002. Draft UITF Abstract on treasury shares and proposed revision of Abstract on ESOP trusts It would require that treasury shares to be accounted for as a deduction from shareholder's funds and no gain or loss to be recognised in Profit or Loss account or Statements of Total Recognised Gains and Losses on purchase or subsequent sale or cancellation Draft UITF Abstract, Emission rights The principal conclusions of the draft is that a separate asset (for emission allowance held) and a liability (for the obligation to deliver allowances for emissions made) should be recognised. Investment trust companies revised SORP The association of Investment Trust Companies (AITC) has published a revised Statement of Recommended Practice (SORP), Financial Statements of Investment Trust Companies. It replaces the 1995 SORP and has been updated for new and revised accounting standards issued since 1995. April 2003 Update Exposure Draft of Application Note to FRS 5 on Revenue Recognition On 27 February 2003, the ASB published an exposure draft of an amendment to FRS 5 Reporting the substance of transactions. The exposure draft proposes the addition of a new Application Note G dealing with revenue recognition. Given the importance of this subject, it may seem surprising that the ASB is choosing to amend FRS 5, rather than publishing an exposure draft of a new FRS. The ASB explains this against the backdrop that international standard setters are at present working on revenue recognition. It is too early to predict the outcome of that work and, in the interests of convergence, the ASB does not wish to issue separately a full standard on revenue recognition. Accordingly, the exposure draft does not deal comprehensively with the subject. It sets out some basic principles, together with specific guidance for five types of transaction, with the intention (though perhaps not the result) of codifying existing good practice. The basic principles set out in the exposure draft link revenue recognition to the seller's performance of its contractual obligations. This focus on performance is broadly in line with the ASB's discussion paper published in July 2001, although some of the terminology and emphasis is different. Revenue will normally be the amount specified in a contractual arrangement, as adjusted for discounts and, where material, the time value of money and risk. The five aspects on which specific guidance is given are: long term contractual performance; separation and linking of contractual arrangements (i.e. 'unbundling' and 'bundling'); bill and hold arrangements; sales with rights of return; and presentation of turnover as a principal or as an agent. The preface to the exposure draft explains that the guidance "is based on existing UK accounting practice and does not introduce significant new requirements". It goes on to say that, in consequence, "it is not anticipated that it will give rise to significant changes in the approach adopted by the majority of entities for the recognition of revenue and turnover." Nevertheless, certain aspects of the proposals seem likely to result in changes for many UK companies, some more serious than others. In particular, the following proposals may have widespread impact. Bad debt risk - One of the risks borne by the majority of sellers is bad debt risk. Where this risk is material (i.e. where bad debt expense is material) it will apparently be adjusted against revenue. Regardless of its conceptual merits, we do not believe this proposal can be said to codify existing good practice, which is to treat bad debts as an expense. Agency arrangements - Although the proposals as drafted seem open to interpretation, the exposure draft apparently implies that, in some circumstances at least, an undisclosed agent may recognise as turnover only the net amount of commission received from its principal. As discussed in GAAP 2003, we believe that existing good practice is for an undisclosed agent to account for turnover gross, because it is holding itself out as a principal. In addition to possible changes in some practices, the draft Application Note may create uncertainties over others, which will arise partly from the relatively unfamiliar language in the exposure draft. For example, where a right of return has been granted, the exposure draft indicates that it will generally be possible to estimate the level of returns. Only in an extreme case will no reasonable estimate be available. Regardless of how large the proportion of returns is expected to be, the exposure draft proposes that revenue should be recognised at the outset for the expected level of "non-returns". It is not immediately clear how this approach can be reconciled to the derecognition rules set out in FRS 5, the standard the draft Application Note seeks to interpret. The ASB has indicated that the final Application Note could come into force for periods ending on or after 22 September 2003. Comments on the Exposure Draft are requested by 30 May 2003. Revised OFR Statement – effective immediately, non-mandatory The revision of the Statement "Operating and Financial Review" was published in January 2003 and whilst effective immediately, has persuasive rather than mandatory force. The revision is very similar to the Exposure draft (reported in the October 2002 IASPlus Newsletter) and includes the following recommendations. Highlighting accounting policies that require judgement in their application and to which the results are sensitive. Providing a reconciliation between amounts that have been adjusted (usually called "pro-forma information") and the financial statements. Identifying and commenting on the measures that the directors use as key indicators in the business. To help directors preparing an OFR, the Institute of Chartered Accountants in England and Wales (ICAEW) has produced guidance "Preparing an OFR: Interim process guidance for UK directors". The guidance promotes six principles for directors preparing an OFR. The Statement can be obtained from ASB Publications, telephone 020 8247 1264. The ICAEW guidance can be obtained from the ICAEW, telephone 020 7920 8493 or The ICAEW Website. January 2003 Update Deferral of FRS 17, Retirement Benefits The ASB has published a final amendment to FRS 17, Retirement Benefits. This amendment delays the mandatory full implementation of FRS 17 to avoid UK companies having to change their accounting policy twice in a short period of time (to FRS 17 and then to IAS 19). The final amendment to FRS 17 extends the date of implementation to periods beginning on or after 1 January 2005, to coincide with the EU Regulation's timetable for adopting IAS by listed companies. The early full implementation of FRS 17 is still encouraged. Where full implementation is deferred, disclosure is required of the amounts that would otherwise have been shown in the profit and loss account, the statement of total recognised gains and losses and the balance sheet. Exposure Draft on Share-based Payment Issue In November 2002 the Accounting Standards Board (ASB) has issued the exposure draft FRED 31, Share-based Payment. This FRED presents proposals for a UK accounting standard based on ED 2 Share Based Payment as issued by the IASB. Comments are invited by 7 March 2003, the same deadline as the IASB. Consultation Paper on Business Combinations On 5 December 2002 the ASB issued a consultation paper on the IASB's Exposure Draft on Business Combinations (ED 3), which also includes proposed Standards on intangible assets and impairment. Comments on the consultation paper are requested on 4 April 2003, the same date the IASB has set for their comment deadline on ED 3. The reason why the ASB has issued a consultation paper on Business Combinations instead of an exposure draft are the following: The complexity and the timing of the IASB's two stage project would make it impractical to start the implementation of Phase I in the UK without the remainder of the IASB's decisions in Phase II of the Business Combinations Project. Secondly, the ASB has expressed its concern that adopting the IASB's Phase I proposals, would not lead to an improvement in financial reporting in the UK and the Republic of Ireland. The ASB has expressed reservations against the following issues: — The use of acquisition accounting for all business combinations, even when an acquirer does not exist. - The proposal to no longer amortise goodwill but to carry all goodwill after initial recognition at cost less any accumulated impairment losses. — The fact that the impairment tests as proposed by the IASB are less rigorous than the present practice in identifying impairments, particularly goodwill under UK GAAP. — The lack of symmetry under the proposals in the treatment of intangible assets and goodwill, which could give rise to problems, given the lack of clarity of the distinction between the two. Draft UITF Abstract on Contracts for Sales of Capacity The ASB's Urgent Issues Task Force (UITF) has issued a draft consensus dealing with the issues arising where entities buy and sell capacity on each other's networks. These issues arise mainly in the utilities and telecommunications industry. The draft concludes that a seller of a right to use capacity should not report the transaction as the immediate sale of an asset, or of a component of a larger asset, unless: the purchaser's right of use is exclusive and irrevocable; the asset component is specific and separable (such that the buyer's exclusivity is guaranteed and the seller has no right to substitute other assets); the term of the contract is for substantially all of the asset's useful economic life; the attributable cost or carrying value can be measured reliably; and no significant operational risks are retained by the seller. If the transaction is a sale of an asset it will be reported as turnover or a fixed asset disposal based on the previous designation of the asset as stock or fixed asset on construction or purchase. Revenues or gains in respect of reciprocal transactions for cash or contracts exchanging capacity should be recognised only if the capacities received and provided have a readily ascertainable market value. Comments on this Draft UITF Abstract are due by 28 January 2003. October 2002 Update Directors' Remuneration The Director's Remuneration Report Regulations 2002 have come into force, effective for accounting periods ending on or after 31 December 2002. The new requirements will mean that companies falling within their scope (see below) will have to: publish a report on directors' remuneration as part of the company's annual reporting cycle; and put an annual resolution to shareholders on the remuneration report. The report should contain the following: consideration by the directors of matters relating to directors' remuneration; a statement of the company's policy on directors' remuneration for the following and subsequent years; details of directors' service contracts; a performance graph (a line graph providing, for each of the last five years, total shareholder return for both the company and an index such as the FTSE 100); and details of individual director's remuneration (which is subject to audit). The latter would broadly replicate the Listing Rules requirements for the directors' emoluments table (including compensation for loss of office), share options, long term incentive schemes and pensions, but the information will have to be in a prescribed tabular format to facilitate comparison. One of the most significant differences is within the pension disclosures. There are more onerous disclosures for directors' defined benefit schemes, which include showing the transfer value at the beginning and end of the year. Another difference is that the details on share options only have to be given in respect of share options granted after a person was appointed a director of the reporting entity. Similarly, details of LTIP awards only have to be given where shares or other assets are receivable in respect of services after a person has been appointed a director of the reporting entity. The requirements will apply to companies whose equity share capital is officially listed in an EEA state (EU plus Norway, Iceland and Liechtenstein) or is admitted to dealing on either the NYSE or the NASDAQ. AIM companies and companies which only have debt or non-equity share capital listed do not fall within the scope of the regulations. The FSA has signalled that it will remove requirements from the Listing Rules where they overlap with the new statutory disclosures. Click Here to see the relevant statutory instrument. A second statutory instrument (with the same effective date) stipulates which of the disclosures on directors' remuneration should be included in summary financial statements. This can be accessed Here. Modernising Company Law - White Paper Following on from the recommendations made by the Steering Group of the Company Law Review last year, the Government published a White Paper Modernising Company Law in July 2002. The proposals include significant changes to the way in which companies are constituted and governed in law. As regards company reporting, key changes proposed include the following: For large public and very large private companies, the directors' report would be replaced by a new style mandatory operating and financial review (OFR). The review would include a statement of the company's business, a fair review of performance and a fair projection of the prospects and of events which will, or are likely to, substantially affect the business. It would also include policies on employment, environmental, social and community issues relevant to the business, and be subject to an auditors' report on the adequacy of the procedures in preparing the review. For companies not required to prepare an OFR, the directors' report would be replaced with a short simple supplementary statement. An increase in the size thresholds that constitute the definition of a small company. A reduction in deadlines for filing accounts for public companies from seven to six months and for private companies from ten to seven months. A requirement for quoted companies to publish their preliminary announcement and annual report on their website. They would then be required to notify electronically those members that have agreed to have access via the website, rather than in hard copy. A summary of the bill can be found Here. Revision of the ASB's Statement on the OFR In June 2002, the ASB published an exposure draft Revision of the Statement 'Operating and Financial Review' containing proposed amendments to its existing best practice statement. Six principles that should be applied by directors when preparing an OFR have been proposed. They cover: the purpose of an OFR; the audience for an OFR; the time-frame covered; reliability of information; comparability (over time and between entities); and the use of measures in an OFR. It is proposed that the discussion of 'performance' in the OFR should be widened. The existing Statement focuses on amounts reported in the profit and loss account, whereas the exposure draft indicates that the OFR should also discuss performance in the context of any other identified business objectives (for example, total shareholder return, market position, net cash flow or environmental performance). A new section has been added on 'the business, its objectives and strategy', to provide a context for the discussion of performance and financial position in the remainder of the OFR. Additional emphasis has been placed on discussion of the strengths and resources of the business that are not reflected in the balance sheet (internally generated intangible assets, for example). The discussion of 'investment for the future' has been widened in comparison to the existing focus on capital expenditure. The proposed successor body to the ASB is to have responsibility for setting rules on the form and content of any future mandatory OFR (as proposed in the White Paper on modernising company law, discussed above). The ASB has indicated that this exposure draft has been drafted in the context of a voluntary review. It would seem likely that the proposed guidance would need to be revisited should the OFR become a mandatory part of the annual report. July 2002 Update ASB Issues Exposure Drafts to Align with International Accounting Standards On 15 May 2002, the same day as the IASB issued its Exposure Draft on the Improvements Project, the Accounting Standards Board (ASB) published seven Financial Reporting Exposure Drafts (FREDs) relating to the first stage of a three phase programme to align UK accounting standards with International Accounting Standards (IFRS). The draft documents are ultimately intended to align UK standards with IFRS in these areas. The ASB has announced its intention to align UK accounting standards with IFRS sooner than the EU imposed 2005 deadline for listed companies, wherever possible. The programme to align standards will be split into three phases. FREDs that either revise existing standards or introduce new standards are to be issued in each of these phases for discussion over the next three years to 2005. This programme will be arguably the largest consultative process that the UK accounting profession has ever undertaken. The ASB's claimed aim is to help ease the 2005 adoption of international accounting standards for group financial statements of listed companies, and in doing so will also adopt the substance of IFRS for individual financial statements and unlisted companies. This in essence is replacing the 'big bang' approach of an implementation in 2005 with a phased transition over three years. As part of the first phase the ASB has issued seven exposure drafts. With the exception of FRED 23 on hedge accounting, these cover topics and pick up proposals that are also included in the IASB's Exposure Draft on the Improvements Project. No paper has been issued specifically by the ASB in respect of the phased implementation approach; instead it is discussed in the FRED relating to the following topics: FRED 23, Financial Instruments: Hedge accounting. FRED 24, The effects of changes in foreign exchange rates; Financial reporting in hyperinflationary economies. FRED 25, Related parties disclosures. FRED 26, Earnings per share. FRED 27, Events after the balance sheet date. FRED 28, Inventories; Construction and service contracts. FRED 29, Property, plant and equipment; Borrowing costs. Of these exposure drafts, FRED 23 is likely to be the most significant, with the other FREDs only proposing minor changes compared to current UK GAAP. FRED 23 The UK currently has very little guidance on hedge accounting, despite the very significant effect it can have on an entity's financial statements. FRED 23 will place limits on the use of hedge accounting and hedge accounting techniques. These cover hedges of net investments in foreign operations. FRED 23 is based on the hedging section of IAS 39 'Financial Instruments: Recognition and Measurement', but not an exact replica. FRED 23's requirements are less exacting than the relevant part of IAS 39. Consequently it should be emphasised that compliance with FRED 23 would not result in compliance with IAS 39, however compliance with IAS 39 is likely to result in compliance with FRED 23 (in all but one area). The additional requirements of IAS 39 are expected to come in at phase II or phase III. The Accounting Standards Board (ASB) has issued in June an Exposure Draft entitled FRED 30 'Financial Instruments: Disclosure and Presentation; Recognition and Measurement'. The paper is based on the IASB's recently published proposals for revisions to IAS 32 'Financial Instruments: Disclosure and Presentation', and on IAS 39 'Financial Instruments: Recognition and Measurement'. It sets out proposals on accounting for financial instruments which will result in the withdrawal of FRS 4, Capital Instruments, and FRS 13, Derivatives and Other Financial Instruments: Disclosures. The Proposals FRED 30 applies to banks and to companies with capital instruments listed or publicly traded, and to contain all the requirements of IAS 32 and IAS 39 except those on recognition, derecognition and 'recycling'. The recognition and derecognition criteria will not change from current UK practice. Amounts that under IAS 39 are required to be taken to equity and 'stored' there until they are 'recycled' to the profit and loss account, under UK proposals are to be either taken to the statement of total recognised gains and losses, or recognised on the balance sheet and then released to the income statement at a later stage. The proposals assume that the changes required to be made to companies legislation to permit fair value accounting will come into effect in 2004. On this basis, the proposed implementation timetable is likely to be as follows: Presentation – assuming that the IASB indicates that IAS 32 is unlikely to change before 2005, UK standards should be amended (with effect 1 January 2004) to implement its requirements in full. FRS 4 (and related UITFs) would be withdrawn; Disclosure – effective 1 January 2004, UK standards on financial instruments disclosures (FRS 4 and 13) will be replaced by a UK standard implementing IAS 32 disclosure requirements; Measurement and hedge accounting – to become effective on 1 January 2004 so that if an entity chooses to use fair value accounting, it must then adopt IAS 39 fair value measurement and hedge accounting model in full. From 2005, the fair value measurement requirements of IAS 39 will become mandatory; and Recognition – no change to current UK requirements until IAS is fully adopted. The effect of these proposals is that: IAS 32 requirements will be implemented for all banks and for companies having listed or publicly traded capital instruments, effective 1 January 2004; and IAS 39 requirements will be available at the same time for entities that choose to adopt fair value accounting. The main changes to the existing UK requirements are as follows: Presentation The 'non-equity' category in shareholders' funds will be removed; more capital instruments will be classified as liabilities (e.g. redeemable preference shares); Split accounting will be used for compound instruments, (e.g. convertible debt will be split into its equity and liability components); and The offset rules for debit and credit balances in the balance sheet will be different, and we believe it will be harder to get offset treatment under the FRED 30 proposals. Disclosure The existing requirements will be replaced by IAS 32 requirements, which in some aspects are less detailed; and The disclosure requirements will be extended to include listed insurance companies and groups. Measurement It is expected that the Companies Act will be amended to permit measurement of financial assets and liabilities at fair value with an immediate recognition of all changes in fair value in the profit and loss account. If the fair value measurement rules are applied, then the company will: Measure all derivatives, available-for-sale assets and instruments held for trading at fair value; Measure all other financial instruments at amortised cost, unless an election is made on initial recognition to measure them at fair value; and Recognise in the profit and loss account all changes in the fair value of financial instruments, except those arising on valuation of available-for-sale assets, which should be recognised in the statement of total recognised gains and losses. Hedging Companies that elect in 2004 to adopt fair value accounting, and also choose to adopt hedge accounting, must then follow all the IAS 39 rules on hedge accounting, which go much further than the FRED 23 requirements. Exposure Draft Proposing Amendments to FRS 17, Retirement Benefits The Accounting Standards Board announced early July its intention to issue an Exposure Draft proposing an amendment to FRS 17, Retirement benefits, which will defer the full accounting impact of FRS 17 and, instead, extend the period during which FRS 17 information is given in footnotes. This will not affect the eventual inclusion of pension assets and liabilities on the balance sheet or the ASB's encouragement to apply FRS 17 in full early. May 2001 Update The last several months of 2000 and the beginning of 2001 were busy and eventful for the Accounting Standards Board (ASB) in the UK. In this short space of time the ASB issued the following standards, exposure drafts, UITF and other publications: Accounting Standards FRS 17, Retirement Benefits, issued 30 November 2000, becomes fully effective for periods ending on or after 22 June 2003 with certain disclosure requirements becoming effective earlier. Requires reflection of assets and liabilities from pension obligations at fair value and costs and value changes as they arise in a radical change from SSAP 24 approach. FRS 18, Accounting Policies, issued 7 December 2000, becomes effective for periods on or after 22 June 2001 (with some parts becoming effective later). It supersedes SSAP 2, updating it to be consistent with the Statement of Principles and other recent pronouncements. FRS 19, Deferred Taxation, issued 7 December 2000, becomes effective for periods ending on or after 22 January 2002. It supersedes SSAP 15 with a move to full provision basis for timing differences using the incremental liability approach. Provision will be required for timing differences and committed transactions. Allows discounting. Exposure Draft FRED 22, Reporting Financial Performance, issued 14 December 2000. Comments invited by 30 April 2001. The ASB moved ahead of IASC and the other former members of G4+1 group of standard setters in developing a comprehensive statement of financial performance. The FRED is based on earlier discussion paper prepared by the G4+1. UITF Interpretations UITF 27, Review of Useful Economic Life of Goodwill, effective from 8 December 2000. UITF 28, Operating Lease Incentives, effective for periods ending on or after 22 September 2001. UITF 29, Website Development Costs, effective for periods ending on or after 23 March 2001. UITF 30, Date of Award of Rights to Shares, effective for periods ending on or after 22 June 2001. Discussion Paper Revision of Financial Reporting Standard for Smaller Entities. Special Projects JWG working paper on financial instruments published for consideration in the UK. The Convergence Handbook, a study sponsored by the Institute of Chartered Accountants in England and Wales that compares UK financial reporting requirements with IAS and SIC issued by the IASC. As in other EU countries, in the UK, the issue of convergence between the national requirements and the IAS is going to dominate the standard setting agenda for the next few years. The publication of The Convergence Handbook is expected to help the ASB to identify and prioritise the areas where national standards should be changed and where it should try to influence the IASB to consider a UK approach or undertake a joint project. On 1 January 2001, Mary Keegan became the new chairman of the ASB. She replaced in this role Sir David Tweedie who is the new chairman of the IASB. While continuing to work on its current projects the ASB is likely to use this opportunity to undertake a strategic rethinking of its future role in the context of developments in Europe and internationally.